The Motley Fool

How Will SABMiller Plc Fare In 2014?

For most shares in the FTSE 100, 2013 was a good year and investors have likely enjoyed capital gains and rising dividend income.

That makes me nervous about investing for 2014 and beyond, and I’m going to work hard to adhere to the first tenet of money management: preserve capital.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

To help me avoid losses whilst pursuing gains, I’m examining companies from three important angles:

  • Prospects;
  • Risks;
  • Valuation.

Today, I’m looking at international brewer SABMiller (LSE: SAB) (NASDAQOTH: SBMRY.US).

Track record

With the shares at 3111p, SABMiller’s market cap. is £49,906 million.

This table summarises the firm’s recent financial record:

Year to March 2009 2010 2011 2012 2013
Revenue ($m) 18,703 18,020 19,408 21,760 23,213
Net cash from operations (£m) 2,183 3,277 3,043 3,937 4,101
Adjusted earnings per share (cents) 137.5 161.1 191.5 214.8 238.7
Dividend per share (cents) 58 68 81 91 101

1) Prospects

The recent half-year results reveal respectable progress at SABMiller with a 4% rise in revenue compared to the year-ago figure. Looking at the table above, the firm seems to move steadily forward, increasing sales and earnings, and raising its dividend. Around the world, alcoholic beverage consumption remains popular and has great repeat-business credentials. That’s why investors often seem to hold SABMiller’s shares for their ‘defensive’ characteristics, particularly in times of economic uncertainty.

The firm is expanding across the world, with the latest results showing that 20% of revenue came from Latin America, 19% from Europe, 18% from North America, 16% from the Asia Pacific and 12% from wider Africa. The wide geographic spread of operations is reassuring, as well-performing regions can offset weakness in other regions. For example, on a constant currency basis, African turnover is up 11% whilst revenue from Europe declined by 1%.

Key to SABMiller’s on-going success is the strength of its drink brands. Consumers tend to be loyal to the firm’s trusted brands such as Miller Lite, Castle and Grolsch. However, the company tunes into its regional markets and many of its 200 or so beer brands remain market-specific without aiming to spread globally as is the strategy employed by some other brewers. That doesn’t mean SABMiller lacks punch; it is one of the world’s leading brewers with more than 200 beer brands and some 70,000 employees in over 75 countries. The company also has a growing business in soft drinks and claims to be one of the world’s largest bottlers of Coca-Cola products.

With such a broad reach, the great opportunity for SABMiller seems to be the way the firm has positioned itself to grow with the expanding affluence of populations in emerging economies.

2) Risks

The firm reckons it faced trading challenges in a number of territories during the first half of the year. For example, depreciation of the South African rand caused economic headwinds, and excise increases affected performance in Latin America. Meanwhile national strikes and social unrest caused havoc in Colombia — a global footprint is capable of bringing with it a variety of regional global difficulties. However, such issues appear to be temporary and global, brand-loyal beer drinking looks set to continue in the long run.

One investment risk for SABMiller shareholders is that the shares might cycle in and out of popularity. Investors tend to buy companies with ‘defensive’ businesses in uncertain times, which can drive P/E ratings up. So, there’s a risk of P/E compression as general economic cycles unfold and investors, perhaps, move on to ‘riskier’ investments.

Net debt is running at about 2.3 times the level of operating profits. The firm relies on its consistent cash flow to manage interest payments, which seems fine as long as nothing happens to threaten that cash flow.

3) Valuation

A forward P/E rating of just over 18 looks ahead of the 11% earnings growth and the 2.4% dividend yield expected in 2015. Forward earnings cover the forward dividend about 2.3%.

In my view, there’s plenty of room in that valuation for P/E compression going forward, which could compromise investor total returns.

What now?

SABMiller’s brand-driven growth leads to a strong economic franchise as customers return repeatedly to buy the firm’s brews, but I’m worried about the company’s premium valuation at this point in the economic cycle.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

> Kevin does not own shares in SABMiller.

Where to invest £1,000 right now

Renowned stock-picker Mark Rogers and his select team of expert analysts at The Motley Fool UK have just revealed 6 "Best Buy" shares that they believe UK investors should consider buying NOW.

So if you’re looking for more top stock ideas to try and best position your portfolio in this market, then I have some good news for your today -- because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.